Dividends4Life (43.58)

Why Dividends Matter

6

It seems that every financial adviser or financial publication is proclaiming that you should own dividend stocks. Each are proclaiming the virtues of dividend stocks from their own perspective.

To that I have two questions:

1. What took you so long? 2. Do you really understand why dividend stocks are such a good long-term investment?

"The beatings will continue until morale improves" is a whimsical statement that I first saw many decades ago. The end result of improved morale is a desirable goal, but obtaining it through beatings is not a path most people would want to take.

In much the same same way many "experts" are now recommending dividend stocks based on this investing makeup. Some are recommending dividend stocks as part of their sector rotation, or as the next hot fad, - stay tuned and they will tell you when to jump out. Others are recommending dividend stocks as substitutes for bonds since yields on fixed income investments have all but dried up.

Both arrived at what I consider to be the correct conclusion, but do they really understand why dividends matter? Below are 9 reasons why dividends matter in all markets:

1. In a troubled market, dividends provide investment stabilityWhile everyone else is panicked about their portfolio's decline, dividend investors see a downturn as an incredible buying opportunity.

2. Unlike earnings, dividends can't be manipulated or fakedFrom an accounting standpoint, it is relatively easy through fraud and manipulation to make an income statement look quite impressive. There is no faking the cash that shows up in your brokerage account.

3. Dividends provide continuous feedbackAs time passes dividend investors see their income steadily grow. You do not have to wait five to ten years to determine if the strategy is working. Each dividend and dividend increase provides the investor with reassurance that the strategy is working.

4. Reinvested dividends provided a significant portion of the historical equity returnsPerformance in any given year is driven by capital appreciation, but long-term returns are largely the result of reinvested dividends.

5. Good dividend companies grow their dividendsYou expect your employer to give you a raise periodically. Why wouldn't you expect the same from your investments?

6. Spending dividends in retirement, does not harm your principle investmentIn addition, a good dividend portfolio can be left to your children and their children.

7. A dividend portfolio is relatively low maintenanceYou may not want to spend your retirement managing and worrying about your portfolio.

8. Dividends help identify well-managed companiesCompanies that grow their dividend on a regular basis tend to be those in better off financially and are able to sustain earnings growth.

9. Dividend-paying stocks provide a built-in returnCompanies that pay a sustainable and growing dividends, are more resilient in down markets. In the up markets they enjoy capital appreciation as earnings grow to support the increasing dividend.

Below are 11 stocks that have consistently paid dividends through depressions, recessions, world wars, and other political and economic upheavals:

Middlesex Water Co. (MSEX) Yield: 3.9% | Paid Dividends Since: 1912 MSEX primarily provides regulated water utility service in parts of New Jersey and Delaware, as well as operates wastewater systems and conducts municipal contract operations.

Avista Corporation (AVA) Yield: 4.3% | Paid Dividends Since: 1899 AVA generates, transmits and distributes energy as well as engages in energy-related businesses. The company operates in two business segments.

Consolidated Edison, Inc. (ED) Yield: 4.0% | Paid Dividends Since: 1895 ED is an electric and gas utility holding company that serves parts of New York, New Jersey and Pennsylvania.

NSTAR (NST) Yield: 3.7% | Paid Dividends Since: 1879 NST is a Boston-based holding company that serves some 1.4 million electric and natural gas customers in Massachusetts, and has agreed to be acquired by Northeast Utilities.

Try telling these companies that dividends don't matter. Or more importantly, try telling these companies' shareholders that dividends don't matter. A healthy and wealthy retirement comes from building a secure portfolio, not watching for the next fad.